NEW YORK, July 25 (IFR) - The prospect of a technical
default by Argentina is looming as the government and holdout
investors stare each other down in a very public battle of
nerves ahead of the expiration of a grace period for debt
payments on July 30.
Efforts this week by US District Court Judge Thomas Griesa
to force the two parties together until they reached an
agreement brought some comfort, but growing frustration about
the lack of progress in negotiations has whip-sawed Argentine
"It is not too late to work out some sort of accord and
avoid default, but they are leaving it to the eleventh hour,
which Argentina has done before," said Stuart Culverhouse, chief
economist at broker Exotix.
The buyside has largely been betting on a last-minute
resolution to the country's holdout crisis, putting a floor
under bond prices, but with just days left before payments are
due, investors have been fretting about their exposure to
"I would have been selling the bonds on Argentina's
deteriorating fundamentals and the only thing that kept me
holding them was the possibility of a settlement [with
holdouts]," said a US-based investor. "If we are not going to
see a settlement, it makes me think twice."
Heated rhetoric from both sides has only inflamed concerns
about a negative outcome to closed-door negotiations. Bond
prices took another hit on Friday morning after holdout investor
NML Capital circulated an email saying it was clear that the
South American country would choose to default this week.
"This outcome is unfortunate and completely unnecessary," an
NML spokesman said in a statement. "We will continue to seek
ways to engage Argentina in negotiations, but there is currently
a total lack of willingness on Argentina's part to solve the
In turn, Argentina has expressed a need to reach a solution
that would avoid triggering a so-called RUFO clause that might
lead to further lawsuits if it offered better terms to holdouts
than those given to investors during the 2005 and 2010
Without such guarantees, the government is seeking a stay to
reach what it calls a "fair, equitable, legal and sustainable"
solution for 100% of its bondholders.
By Friday, neither Griesa nor the holdouts had succumbed to
Argentina's request for a stay. It is assumed that the
government would first have to show a good faith gesture before
a stay was granted.
An agreement that would permit payment next year after the
RUFO clause expires may suffice to convince holdouts to push for
a stay until then, allowing Argentina to make payments to
existing exchange bond holders next week and avoid a technical
This idea was floated this week in local Argentine newspaper
La Nacion, which quoted sources saying that NML would ask Griesa
to reinstate a stay until the end of the year, and in return
have Argentina deposit money in an escrow account.
Fellow holdout fund Aurelius Capital, however, called the La
Nacion report "utter fiction", according to Reuters.
Still, if both parties can overcome their differences on a
stay, the rest of the process is seen as relatively
straightforward, notwithstanding the complications of further
"me-too" claims in the wake of a legal victory for the holdouts.
A template for how to pay holdouts has already been
established through the case of Spanish oil company Repsol,
which received a series of bonds in compensation for the
expropriation of its stake in YPF.
"To get a deal through is less arduous than people think,"
said Michael Roche, emerging markets fixed-income strategist at
the Seaport Group.
Most investors assume that the government would prefer to
avoid a default that would worsen economic conditions for
Argentines and damage President Cristina de Fernandez Kirchner
and her party's political reputation.
If a default happens, however, many think that fallout - at
least in the financial markets - would be comparatively mild.
Sovereign CDS has been pricing in high default expectations,
with traders quoting five-year protection this week at 1,480bp.
But bond prices provide a different story.
On Friday, discount 2033 notes were still trading in the mid
to high 80s, while pars were at around 53.50-54.25.
"CDS may get triggered, but bond markets are not pricing
this in because even if Argentina defaults, it will be
short-lived," said one trader.
A knee-jerk reaction to the news is likely to ensue, as
investors that are forbidden to hold defaulted bonds will be
forced to liquidate.
Yet many feel prices would find a floor at around 50-60
cents rather than the 30 or below levels seen in a typical
restructuring scenario. That's because the government has
expressed willingness to pay exchange bond holders and is likely
to find ways to fulfill such promises.
"The price action on the pars tells you a lot about how
people are positioned," said a hedge fund manager. "They are
priced at the potential recovery value and are the most likely
to be accelerated in the event of a default."
Yet arguments that Argentina is willing and able to pay may
ultimately prove flimsy should a default spark a dramatic
reduction in foreign reserves.
"If we have a few months like we had in December and January
when reserve levels collapsed, you might have an inability to
pay," said the US-based investor.
(Reporting by Paul Kilby; Additional reporting by Joan Magee
and Davide Scigliuzzo; Editing by Matthew Davies)